Liquidity understandably remains a concern for anyone working in the fixed-income space, with problems often attributed to over-regulation of the banking sector and banks’ apparent inability to hold risk.
Lundie sees the debate as looking at “hedgeable versus non-hedgeable” credit. “Things that are hedgeable, such as index products or large companies that have multiple layers of their cap structure, the liquidity in that part of the market is fine, and that’s what we are involved in.
“What’s not fine is things that are not hedgeable, as the bank has no ability to warehouse that risk. There is European high yield right now where it is just one security; no equity, no loans, just one bond. If there is just one bond and nobody on the other side then there is just no price. That part of the market is increasingly going to a direct lending-type model.”
Hermes’ three funds all offer daily liquidity in the Ucits structure, and it is to some degree bond market illiquidity that the firm believes is a driver behind the need for more global-looking and unconstrained vehicles, whether they be strategic bond or absolute return funds.
Finding the sweet spot
Still, looking ahead, Lundie says he is happy to stick with firms that have historically had “boring” business models, particularly in investment grade, where he believes mispricing has created something of a “sweet spot” for unchartered opportunities.
“In a world where you are probably going to continue to have next to no growth and next to no inflation, you would expect the sweet spot to be in BBB and to some extent BB credit, as that tends to be where you will see performance,” he says.
“We are positive on that space and in particular the US, where much of what is going on is very inward looking, such as in auto parts, because the market is not fully appreciating the structural shifts going on.
“For a lot of these companies, they have traditionally boring low-margin models, such as making exhaust pipes, but they are increasingly evolving to make things involved in safety or internet connectivity or green cars.
“These are not 5% margin activities, they are 15% margin and the market is not appreciating that shift for some of those players, such as Lear or Delphi.”
With Multi Strategy Credit having launched in 2014 and Absolute Return Credit a year later, it is clear Lundie and his team are still at a relatively early stage in gaining mass appeal from the retail market.
However, given the unpredictability of credit, and their conviction that they are genuinely bringing something different to the space, the team at Hermes is definitely one to watch.
